Option Trading Will Quiet Down Ahead of the Holiday! Here’s A Strategy.

Monday, the market ran up to a major resistance level at SPY 144. To my surprise, it did so with ease. By late afternoon, sellers took profits and demonstrated that it would take a concerted effort to push through that level. That afternoon reversal paved the way for weakness yesterday. Before the open, the PPI was released. The headline number came in better than expected; however, the core rate rose faster than expected. This would imply that food and energy prices have declined in the last month and we know that's not the case. These numbers are seasonally adjusted and the calculations are flawed. The market sold off throughout the day, but it did manage to rally off of its lows before the close. Retail stocks have been releasing earnings and they have been dismal. Home Depot and Lowe's both missed their number and Target guided lower. Higher gasoline prices, a slowdown in housing and economic weakness are to blame. This morning, the market tried to rally on the open and it met early resistance. After the first hour of trading, the market was down slightly. The oil inventories numbers were released at 10:30 ET and a draw on oil and gasoline rallied energy prices. Instantly, the market declined. There isn't much in the way of news to drive this market the rest of the week. Volume will start to dry up as we head into the holiday weekend. This means that any small news item could drive the market in either direction. A major resistance level, weak retail results and higher oil prices should be enough to keep a lid on this market for the next day or two. This afternoon, the FOMC minutes will be released. If they include language that hints of higher rates in the near future, the market will have a negative reaction. As I mentioned yesterday, we have already heard from Fed officials that the easing is over. Tomorrow, initial jobless claims will set the tone for the open. They have been coming in near expectations as of late. Two weeks ago, a warning shot was fired and the market quickly backed off from a relative high. That dip was shallow and brief, indicating strength. There is a good chance that we will see more days like that as the market tries to get through this resistance level. If it is able to claw its way back with greater ease each time, a breakout to the upside is possible. I feel the more likely scenario is a pullback sometime in the next two weeks. This drop will be just enough to get the "sell in May and go away" crowd to bailout of positions. The bid to the market still feels strong; I just don't want to buy at this level. For the time being I will continue to sell out of the money call credit spreads on financials, retail and healthcare. The momentum has been established for today. If the bears can't establish a new intraday low by early afternoon, the market will rally and close unchanged. If the bears can establish a new low this afternoon, prices will drift lower into the bell. Any decline should be rather contained and there is support at SPY 138.

Daily Bulletin Continues...